Outlook. GCC Economic 1Q 2018

Transcription

1 MENA GCC Economic Economic Outlook Q GCC growth to pick up in despite oil output restraint Fiscal deficits to decline further as reforms gain momentum Oil prices rise, but market rebalancing will take time

2 MENA Economic Outlook Q Contents MENA outlook GCC growth to pick up as pace of reform accelerates; oil prices to remain steady.. Bahrain outlook Non-oil growth supported by elevated project spending Kuwait outlook Growth improving on projects and receding fiscal adjustment.. Oman outlook Rising gas output to boost GDP, but fiscal position still a concern Qatar outlook Non-oil growth to slip further as diplomatic row persists Saudi Arabia outlook 9 Non-oil growth recovering on stronger demand and government stimulus UAE outlook Non-oil growth to be fastest in the Gulf region in, at.% Egypt outlook Economy continues to recover as reforms boost sentiment and exports Regional and international data

3 MENA Economic Outlook - Q MENA outlook GCC growth to pick up as pace of reform accelerates; oil prices to remain steady > Daniel Kaye Head of Macroeconomic Research +9 9, danielkaye@nbk.com Overview and outlook The broad-based upswing in the global economy will continue into. But with inflation low, monetary policy will be tightened only gradually. The global oil market is set to rebalance only slowly, with US shale output continuing to hit modern-day highs. Oil prices are projected to remain broadly flat over the forecast period. Growth in the GCC is also strengthening. Non-oil growth will pick up to.% in, helped by growing momentum behind economic reform. There has been major progress on fiscal consolidation, but the GCC deficit will remain considerable at % of GDP in, and much larger in Bahrain and Oman. Our base case is that there is no resolution to the Qatar diplomatic dispute over the forecast period, though the economic impact on the broader GCC region will remain modest. The current broad-based upswing in the global economy is set to continue into, with growth edging up to.% from.% a year before. Growth in the US will be boosted by tax reform measures and, in the eurozone, by the existence of spare capacity following earlier weakness. Emerging market performance will also improve, with growth in India outpacing that in China helped by progress on reforms. But global inflation remains subdued and, as a result, further tightening of monetary policy by key central banks will remain gradual. We forecast two basis point (bp) increases in interest rates in the US in, and the same in 9. Key risks to the outlook include a slide back into protectionism, a sharp slowdown in the Chinese economy that could, in particular, affect commodity markets and financial turbulence as central banks tighten monetary policy. The global oil market continues to transition from a period of oversupply. The agreement among OPEC and some non-opec producers to limit production has succeeded in lifting oil prices well off their lows: Brent prices rallied more than % in H to stand at $/bbl in mid-december. The expectation is that the market will continue to rebalance and global stock levels decline, but that this process will be gradual. Demand growth will be supported in by the solid global economy, but the price rally is incentivizing ever higher levels of US shale output: US oil production reached a modern-day high of 9. million b/d in late. Chart : World/MENA GDP growth World MENA 9 9f Source: International Monetary Fund, NBK estimates Chart : Brent crude oil prices (%/bbl) 9 9 Chart : GCC GDP GDP Non-oil GDP f Source: NBK estimates GCC economic indicators f f 9f Nominal GDP USD tn.... Real GDP % y/y.... Oil % y/y Non-oil % y/y.... Inflation % y/y.... Budget balance % of GDP Source: National sources, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

4 MENA Economic Outlook - Q OPEC policy will therefore remain a delicate balancing act. The production cuts now extended to end- are expected to endure, but there will be growing attention on what happens beyond, with a disorderly unwinding of the current agreement risking a supply surge that would push prices lower. In our baseline, oil prices average $/bbl in and 9, unchanged from. In the GCC region, economic conditions are also strengthening regional GDP will rise % in after stagnating a year earlier. Admittedly, much of this pick-up is linked to changes in oil output driven by OPEC policy: production is assumed to be more or less flat in after the steep cuts seen in, while there is some upside in Qatar if the Barzan gas project comes on-stream. But non-oil growth is also expected to improve to.% from % in, helped by a combination of stronger world growth, an easing in the pace of fiscal consolidation, stable oil prices, only gradual tightening of monetary policy and progress on economic reforms. The UAE could see the fastest non-oil growth in the region, at.%, helped by rising investment spending ahead of Expo, with Kuwait and Bahrain only slightly behind. Chart : GCC fiscal balance (% of GDP) f Source: NBK estimates The regional fiscal deficit narrowed sharply in to.9% of GDP from.9% a year earlier, though around three-quarters of this was due to rising oil receipts. A further, albeit more modest, decline to.9% of GDP is forecast for. Fiscal adjustment has so far focused mostly on government spending, which was cut % between and. While spending restraint is likely to remain a feature of the policy landscape, attention is expected to shift towards increases in non-oil revenues, which will be more administratively complex to implement. The value-added tax (VAT), for example, is expected to be introduced in Saudi Arabia and the UAE early in, and could net % of GDP in revenues. Fiscal adjustment in both Bahrain and Oman remains a major challenge and, with deficits still at -% of GDP, neither looks likely to balance until well into the next decade, leaving both vulnerable to a deterioration in funding conditions. Commensurate with improving growth performance and firmer oil prices, financial conditions also now look more stable. Although loan growth remains generally soft due to cuts in investment spending and headwinds facing consumers, liquidity conditions have improved thanks in part to the continued wave of sovereign debt issuance, with all governments barring Qatar issuing large dollar bonds and sukuk in. Further issuance is expected in, with investors attracted by still high credit ratings in most countries and the growing momentum of economic reform. One regional weak spot has been the equity market, with the GCC MSCI index down % year-to-date in mid-december. On top of the GCC s economic challenges, the Qatar diplomatic crisis has injected political uncertainty. The Qatari economy itself appears to have weathered the initial shock from the imposition of trade and travel restrictions: import levels have recovered with the help of new trade routes; the spike in food prices was smaller than feared; and banking sector outflows have been offset by the injection of government funds. But the economic impact is also likely to accumulate over time, and the spotlight on Qatar will grow ahead of the World Cup in. Our base case is that there is no resolution to the crisis over the forecast period and we expect non-oil growth in Qatar of a modest % in and 9. The economic impact on the GCC more broadly will be limited, though the recent announcement that Saudi Arabia and the UAE will forge closer economic and political ties looks likely to slow any further region-wide integration efforts. Elsewhere, growth in the MENA region overall is set to pick up to.% in from a weak, base effect-influenced.% in. One key component is the turnaround in the Egyptian economy, where a combination of the weaker currency, capital inflows, recovering tourism and structural reforms look set to push growth back above the % mark. NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

5 MENA Economic Outlook - Q Bahrain outlook Non-oil growth supported by elevated project spending > Dana Al-Fakir Economist +9 9, danafakir@nbk.com > Daniel Kaye Head of Macroeconomic Research +9 9, danielkaye@nbk.com Overview and outlook Non-oil growth will remain resilient in and 9, with GCC investments keeping infrastructure spending levels elevated. This will help offset continued oil sector weakness and keep overall growth close to.%. Chart : Real GDP Oil Non-oil Total Inflation will rise to.% in on the planned VAT as well as firmer housing and food inflation. The VAT is expected to add some % to the overall inflation rate. The budget deficit is forecast to gradually narrow, but remain high at -% of GDP. Public spending levels will stay elevated to support infrastructure projects. Weaker foreign reserve levels are applying pressure on the long-standing currency peg to the US dollar. But we expect the government to remain committed to the peg. - 9 Source: Information & e-government Authority, NBK estimates Chart : Total employment - Resilient non-oil sector keeps overall growth at solid levels Growth will continue at a decent pace of around % in and 9, as resilience in the non-oil economy continues to offset weakness in the oil sector. (Chart.) Oil sector output is set to be flat in given Bahrain s participation in the OPEC/non-OPEC oil production cut deal, now extended to the end of. With an average compliance rate of only % so far in, Bahrain could potentially cut oil output further in. However, given that its share of overall production cuts is very small, it may not be pressured to more fully comply with the deal. As a result, we see Bahrain keeping oil output levels broadly steady. In 9, we expect oil activity to pick up and grow by.% as the production deal unwinds and on the back of a new, b/d offshore oil pipeline connecting to neighboring Saudi Arabia. The new pipeline is part of Bahrain s plans to expand its refinery capacity. It will replace the, b/d pipeline, which the government-run Bahrain Petroleum Company was forced to temporarily close in November after an explosion the government claims was carried out by terrorists. Officials say production was restored within a couple of days. Bahrain produces around, b/d of oil, most of which is from the Abu Safa field shared with Saudi Arabia. Bahrain is looking into expanding output from its domestic field by tapping into unconventional gas. Key economic indicators f f 9f, Thousands (LHS) 9 9 % y/y (RHS) - - Q Q Q Q Q Q Source: Information & e-government Authority Chart : Consumer price inflation by sector Total CPI Food Housing Oct- Oct- Oct- Oct- Oct- Oct- Nominal GDP USD bn Real GDP % y/y Oil % y/y Non-oil % y/y.... Inflation % y/y.... Budget balance % of GDP Source: Official source, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

6 MENA Economic Outlook - Q To expand its energy mix, Bahrain is building its first liquefied natural gas (LNG) terminal. It is expected to be completed in 9 and will allow the import of up to. billion cubic feet of gas per day for domestic use. There is talk that Saudi Aramco could link up the terminal with other GCC countries. If so, this would in effect turn Bahrain into a hub for LNG imports for the region. Bahrain is also reportedly in talks with Kuwait s PIC about setting up a petrochemicals plant Chart : Budget balance (% of GDP) Non-oil sector growth, meanwhile, is projected to hold between a decent. and.% in and 9, mainly on the back of elevated levels of infrastructure spending. Over the past few quarters, infrastructure spending has been bolstered by the allocation of funds under the Gulf Development Program a pledge by Bahrain s neighbors in to provide $bn in grants over years to boost investment in infrastructure and housing. Data from MEED pointed to an impressive % y/y increase in executed projects in October. Key areas of project activity include the aluminium sector, an airport expansion, social housing, utilities, roads, renewable energy and telecoms. There are also plans for a second causeway linking Bahrain and Saudi Arabia, connecting Bahrain to the GCC rail network. Non-oil growth has also been supported by healthier gains in the financial services sector, which was up an impressive.% y/y in Q, much higher than the.% growth rate recorded during the same period in. Similar trends are being witnessed across most other non-oil sub-sectors, including the transportation & communications and social & personal services sectors, which were up 9.% y/y and.% y/y, respectively. Growth in manufacturing activity was more muted in due to production disruptions at the Alba aluminium smelter (one of the largest in the world). With these disruptions resolved, growth in manufacturing activity should recover in the near-to-medium term. The pace of employment growth has been strong if volatile since H, helped by solid economic growth including a pickup in activity in the construction sector. (Chart.) In Q, employment grew by a robust.% y/y, up from.% y/y in the previous quarter. Inflation to rise in before steadying in Source: Bahrain Ministry of Finance, NBK estimates Chart : Current account balance (% of GDP) - 9 Source: Central Bank of Bahrain, NBK estimates Chart : Credit growth Personal Business Total Consumer price inflation is expected to rise in, mainly on the back of a planned value-added tax (VAT) as well as firmer housing and food inflation. Latest figures showed inflation gaining momentum, reaching an over oneyear high of.% y/y in October. (Chart.) After falling sharply in Q as the initial impact of subsidy cuts petered out, food price inflation returned to positive territory in mid- and is expected to rise further on the back of planned excise duties on tobacco and soft drinks. At %, the VAT which we assume will be introduced in the second half of is projected to add around % to the overall inflation rate for one year. We see inflation rising from around % in to.% in. We expect inflation to remain at or around that rate in 9, given the economy s decent underlying growth performance. Budget deficit to gradually narrow but remain very high The budget deficit is expected to gradually narrow given ongoing fiscal consolidation efforts as well as some improvement in revenues. But the deficit will remain worryingly large at around 9.% and.% of GDP in and 9, respectively. (Chart.) Sep- Sep- Sep- Sep- Sep- Sep- Source: Central Bank of Bahrain Chart : Deposit growth (-month moving average, % y/y) Public sector Private sector Total Sep- Sep- Sep- Sep- Sep- Sep- Source: Central Bank of Bahrain NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

7 MENA Economic Outlook - Q Fiscal reform has so far been centered on rationalizing subsidies. In, the government lifted subsidies on meat products and approved a new pricing system for fuel to reduce subsidy costs. In, it approved the removal of subsidies on housing utilities. But unlike other GCC countries, government spending in Bahrain is virtually unchanged from levels, highlighting the challenges in cutting areas such as salaries and subsidies. The VAT should raise around $. billion (approximately % of GDP) in additional tax revenue per year. Following a.% y/y estimated rise in public spending in, the state budget pencils in a.9% y/y decline for, on the back of a drop in current expenditures. Capex growth is expected to be supported by GCC grants and come in at around -% y/y in and 9. With the cumulative sum of GCC grant allocations currently standing at less than $. billion year-to-date, according to the Economic Development Board, active projects are projected to continue to grow at healthy rates. Major current projects include Alba s $ billion expansion project, a $. billion airport expansion and a gas plant project worth $ million. With the budget deficit hovering at high levels, the government will continue to look to domestic and international bond markets to plug the shortfall. The latest issue came in late with a $ billion three-tranche bond, at comparatively high premiums of -% and maturities ranging between - years. Government debt now stands about % points higher at around 9% of GDP. This figure is expected to rise to above % of GDP by 9. Assuming an average interest rate on government debt of around %, this implies debt interest payments of around -% of GDP. Fiscal deficit and debt concerns have led to a series of downgrades of the government s credit rating, the most recent being in early December, when S&P downgraded the long-term issuer rating by one notch from BB- to B+, placing it deeper in non-investment grade territory. However, despite the downgrades, yields on five-year government debt have come off the highs witnessed in early thanks partly to a recovery in oil prices. As of end of November, yields on five-year government debt were at.9%, around basis points lower than at the start of. Business lending gains traction after prolonged period of weakness Growth in credit to businesses is expected to offset the continued weakness in personal loans growth, thanks to an ongoing pickup in lending activity in the construction sector. Growth in personal loans has been on a downward trend since early albeit from a strong starting point easing to.9% y/y in September. (Chart.) However, credit to businesses weak in recent years has picked up of late, climbing above % y/y in September for the first time since, thanks in part to a continued recovery in credit to the construction sector. Deposit growth is forecast to remain limited, with government deposits capped by the low oil price environment. Growth in government and private sector deposits stood at.% y/y and.% y/y, respectively, in September. (Chart.) With deposit growth muted, both the narrower measure of the money supply (M) and the broader measure (M) continue to struggle to eke out gains. In September, M declined.% y/y and M growth stood near a multi-year low of.% y/y. (Chart.) Interest rates are expected to continue to rise, reflecting in part rises in official policy rates. The policy rate, currently at.%, is expected to increase by a further bps in December and a further bps in and in 9, in tandem with hikes in the US federal funds rate. Interbank Chart : Money supply growth (-month moving average, % y/y) M M Sep- Sep- Sep- Sep- Sep- Sep- Chart 9: Interest rates (%).. Policy rate. month interbank Nov- Nov- Nov- Nov- Nov- Nov- Chart : Total bank assets* Sep- Sep- Sep- Sep- Sep- Sep- Source: Central Bank of Bahrain; * Retail & wholesale bank assets Chart : m forward FX rate (BHD per US$) Nov- Mar- Jul- Nov- Mar- Jul- Nov- NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

8 MENA Economic Outlook - Q rates jumped following the policy rate hikes of the past year. As of end- November, the -month rate was up bps year-to-date. (Chart 9.) Whilst lending activity may come under some pressure from higher rates, the underlying strength in lending to the business sector is expected to offset some of that downward pressure and support overall credit growth. Chart : Stock market index (all share index) Total commercial bank assets remained in decline in September, falling at a faster pace of.9% y/y mainly on the back of a continued decline in wholesale bank assets. (Chart.) These assets, which make up around % of total bank assets (as of ), fell by % y/y. In contrast, asset growth among the more domestically-centered retail banks rose for the third straight month, but still remained fairly subdued at.% y/y. Reserves and currency to remain under pressure Given large fiscal and external deficits (charts and ), international reserves remain under pressure. The -month forward foreign exchange rate recently hit a one-year high (implying a new low against the US dollar), but the government has vowed to maintain the dinar s peg to the US dollar, being one of the key planks of economic and financial stability. (Chart.) Indeed, the proceeds from the $ billion bond in September helped the central bank s international reserves jump to a more than two-year high of $. billion from $. billion in August. Furthermore, the government has reportedly asked for financial assistance from Saudi Arabia, the UAE and Kuwait to help replenish its reserves. A positive response to the request would improve the government s immediate financial position, though the prospect of such a bailout may still not be viewed favorably by investors. Nov- Nov- Nov- Nov- Nov- Nov- Bahrain stock market rally subsides in Bahrain s All Share Index moved lower through most of broadly in line with regional trends, though as of early December was actually up.% year-to-date, outperforming other GCC markets. (Chart.) The recent climb in oil prices to above $/bbl helped by the extension to the oil production cut deal had little visible impact, limited perhaps by continued moderate economic growth in the Gulf region, as well as geopolitical concerns including the fallout from the Qatar crisis. NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

9 MENA Economic Outlook - Q Kuwait outlook > Nemr Kanafani Head of Research +9 9, nemrkanafani@nbk.com Growth improving on projects and receding fiscal adjustment Overview and outlook Chart : Real GDP growth Non-oil GDP is expected to see further recovery to.-% in and 9 as capital spending ramps up and the consumer sector stabilizes. (%) Total GDP Non-oil GDP The fiscal deficit is seen largely steady in FY/9 and FY9/ with most of the fiscal adjustment behind us and oil prices stable. Inflation is expected to accelerate slightly on hikes in utility prices and dollar weakness, after easing in on cooler housing inflation. Credit growth remains robust, reflecting healthy project execution and comfortable liquidity. Stocks gained on the robust outlook and the market s upgrade by FTSE. - f f 9f Source: Central Statistical Bureau, NBK estimates - The economy continues to bounce back from a slowdown, which was induced by a fiscal adjustment in the wake of the decline in oil prices. Growth in non-oil activity is expected to have improved to.% in, with growth seen accelerating further to.-% in and 9. The key driver has been capital spending, bolstered by the improving implementation of the government s National Development Plan. A shift toward a more gradual fiscal adjustment should also reduce the drag on growth while ensuring continued progress on reducing the fiscal shortfall. Chart : Consumer price inflation (%, annual average) Substantial fiscal buffers, including large foreign reserves and a relatively low fiscal breakeven oil price, provide Kuwait with significantly more space to move gradually on fiscal adjustment than some of its GCC neighbors. As a result, authorities are keen to maintain their commitment to their capital spending plans and to continue absorbing the bulk of Kuwaiti entrants into the labor market. At the same time, the government is pushing forward with needed structural reform in an effort to encourage the private sector to play a larger role in generating new jobs in the medium-to-long term. The outlook is not without its risks. Indeed, the robust growth outlook depends on a continued commitment to the projects pipeline and the ability by the various authorities to push that ahead despite bureaucratic and sometimes political resistance. Though we think this risk is low in the medium term, it could certainly materialize. Meanwhile, though the probability of oil prices moving much lower from current levels has receded for now, it remains a distinct risk. While Kuwait would be able to sustain $ oil for some time, such a scenario is certain to alter the government s fiscal policy and hurt sentiment, with the consequent impact on non-oil activity. Key economic indicators f f 9f f f 9f Source: Central Statistical Bureau; NBK estimates Chart : Budget balance (fiscal year: April-March) Broader fiscal balance* MOF fiscal balance / / / / /f /9f 9/f Source: MOF, CSB, NBK estimates; * Before FGF transfer & incl. invest.inc Nominal GDP KD bn Nominal GDP USD bn Real GDP growth % y/y Oil % y/y Non-oil % y/y.... Inflation (average) % y/y.... Budget balance* % of GDP Source: CBK, MOF, CSB, NBK estimates; *after FGF NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

10 MENA Economic Outlook - Q Non-oil growth to improve further in and 9 After slowing in, the pace of non-oil GDP growth improved to.% in. Non-oil growth had dropped to.% in, a figure which caught most analysts by surprise, including the IMF. The slowdown was largely a result of government spending cuts implemented in the wake of the mid- decline in oil prices. Those cuts, which largely spared capital spending and the government wage bill, reduced spending excluding energy subsidies by % in FY/. The fiscal adjustment has since been far smaller. There was still a decline in spending by around.9% in FY/, but outlays are expected to return to positive growth in FY/ and beyond. This shift to a more supportive fiscal stance should increasingly help non-oil growth in and 9. That, combined with continued strength in project implementation and a recovering consumer sector, should help sustain non-oil growth at.-% in and in 9. Government project activity remains healthy Over the last few years, an improved pace of capital spending has been a key driver of the non-oil economy. We feel that that momentum has been sustained and should continue to provide solid impetus to the economy through 9 and possibly beyond. We estimate that over KD billion worth of projects are likely to have been awarded during the last five years through the end of. While the pace of project awards has slowed, the impact on growth is likely to be sustained in the medium term. The projects pipeline remains solid, with the government still strongly committed to the ambitious capital spending program in the National Development Plan. The plan, as part of Kuwait Vision, seeks to transform the country into a financial, cultural and trade leader and includes capital spending on infrastructure, housing, power and water, and the oil sector. Around a third of the spending is slated to come from public-private partnership (PPP) projects. Though progress on the PPP projects has been slow, it is expected to pick up. Consumer sector bouncing back after slowdown The consumer sector, long a robust and reliable source of growth, appears to be bouncing back after a period of slowdown. The sector was hit in and as a consequence of the decline in oil prices. This happened as households took a more cautious view, with the Ara consumer sentiment index falling to a low of in September. A year on and the index has improved significantly; the index hit in September. (Chart.) The consumer sector continues to be well supported by steady growth in employment and salaries, particularly in the government sector and among Kuwaiti households. Employment growth among Kuwaiti nationals remains relatively solid, with public sector employment growing by around % y/y through June. Expatriate employment has slowed but remains healthy at.% y/y. Real estate market appears to be turning a corner The real estate market has been showing evidence of improvement following more than two years of weakness. Sales for all sectors during the three months through October were up % y/y. (Chart.) Real estate prices also appear to have stabilized, after undergoing an orderly -% correction since. (Chart.) NBK s real estate price indices now show 9 Chart : Private credit growth Source: Central Bank of Kuwait Sep- Sep- Sep- Sep- Sep- 9 Chart : Consumer confidence index (index) Oct- Oct- Oct- Oct- Oct- Oct- Oct- Source: Ara Research & Consultancy - - Month end Annual average Chart : Real estate sales (% y/y, -month average) - - Oct- Oct- Oct- Oct- Oct- Source: Ministry of Justice 9 Chart : Real estate prices (index) General index -month average Residential homes Investment buildings Residential land Oct- Oct- Oct- Oct- Oct- Source: Ministry of Justice, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

11 MENA Economic Outlook - Q prices down -% from a year ago, compared to declines of -% y/y at the end of. Inflation eased significantly in on weak housing rent New revised statistics revealed significantly lower inflation in. Inflation in October eased to.% y/y, down from.% y/y at the end of. (Chart.) The main source of softer price growth has been housing rent, which is now in deflationary territory with prices down.% y/y. Base effects also explain the decline in inflation, especially as the fuel price hikes of September faded. Chart : Oil prices (USD per barrel, Kuwait export crude) Going forward, inflation is expected to pick up pace. A moderately weaker US dollar, which implies a weaker dinar, is expected to put some upward pressure on prices in. Also, the hike in utility prices taking place in stages in and early are expected to filter into the rest of consumer prices gradually in the coming year. Finally, we expect the valueadded tax (VAT) to be introduced in 9, impacting prices moderately then. As a result, average annual inflation is seen picking up from.% in to.% in and.% in 9. Fiscal deficits will persist, but to remain manageable The Ministry of Finance is expected to continue to register a deficit in the medium term, even though oil prices have improved and despite some fiscal consolidation. We expect the price of Brent crude to average around $ per barrel in and 9, little changed from. As a result, the fiscal balance is expected to register a deficit of -% of GDP in FY/9 and FY9/ (chart ), after the mandatory allocation to the Future Generations Fund (FGF), a level that is largely in line with what we expect for FY/. There was some good progress on fiscal consolidation during the first two years after the decline in oil prices, though we expect the pace will slow in the coming two years. The bulk of the progress came in the form of spending cuts. Expenditures were reduced by % and % in FY/ and FY/. Cuts in spending came from general belt-tightening in areas outside the wage bill and capital spending. They have also included cuts in subsidies, with fuel prices and utility rates seeing hikes. Spending is expected to return to positive growth in FY/ and beyond, with the government s focus shifting to the revenue side. Fiscal reforms include the introduction of a corporate income tax and a value added tax (VAT), though both are in early stages and have yet to receive legislative approval by the National Assembly. There is a good chance that the VAT will be introduced in 9, with the corporate earnings tax not likely before. We estimate that these reforms together will boost non-oil revenues by around -% of GDP by. Sovereign wealth fund remains substantial A relatively prudent fiscal policy over the years has allowed Kuwait to amass one of the largest sovereign wealth funds (SWF) in the region. Kuwait s SWF is estimated to be worth around $ billion or % of GDP as at the end of, with the bulk of the assets held overseas. The assets are split between the Future Generations Fund (FGF) and the General Reserve Fund (GRF). The latter, whose holdings are mostly in liquid assets, is generally available to finance the deficit. Kuwait has continued to add to the FGF even as oil prices declined, at the expense of the GRF or increasing public debt. Nov- May- Nov- May- Nov- Source: Kuwait Petroleum Corporation Chart 9: Crude oil production (million barrels per day).. Oct- Oct- Oct- Oct- Oct- Source: OPEC Chart : Money supply growth (% y/y, M) - - Sep- Sep- Sep- Sep- Sep- Source: Central Bank of Kuwait Chart : Central bank foreign reserves (months of imports) Month end Annual average Sep- Sep- Sep- Sep- Sep- Sep- Source: Central Bank of Kuwait, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK, 9

12 MENA Economic Outlook - Q Government tapped domestic and international bonds in FY/ Despite a large SWF, Kuwait has opted to also rely on debt to finance its deficit. Since April, the government issued KD. billion in debt domestically and another KD. billion ($ billion) internationally. This increased total debt to KD. billion or % of GDP as of the end of October. Debt issuance has financed around two-thirds of the deficit since the April. Debt issuance has been on hold since September following the expiration of the law that allows the Ministry of Finance to issue debt. New legislation is being considered by the National Assembly which would renew the issuance mandate, double the sovereign borrowing ceiling to KD billion and permit, for the first time, the issuance of year debt. In the past, issuance was limited to tenors of up to years. Current account recorded its first deficit since liberation After recording its first deficit in over two decades during, the current account is expected to have swung back to surplus in. A surplus of KD. billion was recorded in Q, up from KD. billion in Q. We expect a surplus in as a whole of around KD.9 billion or % of GDP after recording a deficit of.% of GDP in. The improvement has come largely on the back of a higher oil price, with the Kuwait crude oil price expected to have increased by more than % between and. However, after improving in, the current account is expected to deteriorate slightly in and 9. With oil prices expected to remain largely steady and continued growth in imports and worker remittances in tandem with growth in the non-oil economy, the current account surplus is seen shrinking to under % of GDP by 9. (Chart.) Dinar down in on dollar weakness Chart : Current account balance - f f 9f Source: Central Statistical Bureau, NBK estimates Chart : Interbank rates Kibor (KD) Libor (USD) Spread (%, -month) Source: Central Bank of Kuwait, Thomson Reuters Datastream Chart : Exchange rate KD bn (LHS) % of GDP (RHS).. Nov- Nov- Nov- Nov- Nov Following three years of gains, the Kuwaiti dinar retreated during most of. A weaker US dollar has seen the dinar decline by.% in tradeweighted terms year-to-date (ytd) through October. The Kuwaiti currency had gained around % a year in the three years between and. The dinar, which is pegged to a basket dominated by the US dollar, has increased by.% against the US currency since the start of this year. (Chart.)..... USD/KWD (LHS) Trade-weighted exch. rate (RHS) Already good year for equities boosted further by FTSE upgrade. After rallying in late and early, equities were again boosted in Q after FTSE Russell upgraded Kuwait s market to emerging market status. Recent catalysts also included interest by Omantel to acquire a sizeable stake in Kuwait s largest telecom provider Zain. Boursa Kuwait s value-weighted index (IXW) soared by 9.% in Q. (Chart.) The index was up.% year-to-date through October. Activity is also up in, though the daily average value of shares traded has eased from peaks in January.. Nov- May- Nov- May- Nov- May- Nov- Source: JP Morgan, Thomson Reuters Datastream Chart : Stock market Avg daily trading (KD mn, LHS) Weighted index (RHS) Oct- Oct- Oct- Oct- Oct- Source: Boursa Kuwait, Thomson Reuters Datastream NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

13 MENA Economic Outlook - Q Oman outlook Rising gas output to boost GDP, but fiscal position still a concern > Chaker El-Mostafa Economist +9 9, chakermostafa@nbk.com > Daniel Kaye Head of Macroeconomic Research +9 9, danielkaye@nbk.com Overview and outlook We expect real GDP growth to pick up to. % in on a boost from gas exports and modest growth in consumption and investment, then to hold steady at.% in 9. Chart : Real GDP Oil GDP Non-oil GDP Real GDP The fiscal deficit will narrow over and 9 but remain worryingly large at.% and.% of GDP, despite the introduction of VAT and increased hydrocarbon revenues. Inflation will rise in as the government implements new tax measures, with some carry-through into 9. Meanwhile, bank lending may weaken amid an environment of rising interest rates and modest growth. The government is trying to implement Vision, but weak public finances place increasing importance on foreign investment. The economy is set to grow modestly in and 9, but there are considerable vulnerabilities. Activity is still dependent on the hydrocarbon sector given the lack of progress on diversification, and low oil prices have hit growth and present a major financial challenge. The government will record several further years of large fiscal deficits, with revenues insufficient to cover current expenditures, while rising debt will increase the interest burden. Domestic concerns, regional tensions and tightening global monetary policy could lead to a weakening of the external funding climate, leaving the sovereign s reserves open to depletion. Growth to be supported by rising gas production We have revised our growth forecast for lower to.%, from.9%, reflecting the recent extension to the OPEC/non-OPEC production cut deal (to which Oman is a contributor) beyond March, while private and public consumption growth remain modest. (Chart.) The launch of BP s Khazzan project will lend a much-needed boost to the economy, in addition to the pursuit of Vision, but both consumption and investment will be held back with oil prices steady and as fiscal consolidation efforts continue. With the production cut agreement due to expire in 9, crude oil output should return to around pre-cut levels, supporting hydrocarbon sector growth. Gas production s steady expansion towards its increased capacity of close to billion cubic feet per day will further support the sector. Once fully online, BP Khazzan s new capacity will account for % of hydrocarbon output. (Chart.) Meanwhile, as the initial impact of VAT begins to dissipate, household consumption will pick-up, albeit at a modest pace. Despite the f f 9f Source: National Center for Statistics and Information, NBK estimates Chart : Hydrocarbon production (mb/d).. Natural gas Oil f f 9f Source: National Center for Statistics and Information, NBK estimates Chart : Consumer price inflation f f 9f Source: National Center for Statistics and Information, NBK estimates Key economic indicators f f 9f Nominal GDP USD bn Real GDP % y/y Oil % y/y Non-oil % y/y.... Inflation % y/y Budget balance % of GDP Source: National Center for Statistics and Information, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

14 MENA Economic Outlook - Q financial constraints, officials will continue to pursue Oman s Vision, helping unclogg the pipeline of megaprojects needed to diversify the economy away from oil. Chart : Budget balance (% of GDP) According to MEED, Oman is set to award $9 billion in projects between and (equivalent to 9% of GDP), with the bulk ($ billion) expected in the first two years. The planned projects will focus on developing Oman s downstream, tourism, and logistics sectors, key components of the country s diversification plan, with a strong emphasis on the Duqm special economic zone The government s constrained financial position adds uncertainty to the vision s execution, with much riding on favorable oil prices and a friendly foreign investor environment. To that end, the government has pursued some pro-business initiatives, such as its soon-to-be revamped foreign investment law, and sourced large foreign investment partnerships and funding. A consortium of Chinese firms is set to help develop a large part of Duqm, with close to $ billion budgeted to be invested over years. In August, Oman partnered with Kuwait to develop the Duqm refinery. At a capacity of, barrels per day, the refinery will be at the heart of Duqm s petrochemical complex, which is expected to be awarded in. Furthermore, state-owned entities have secured external funding for core development projects, such as Oman Oil Company s $ billion loan. So far, the Saudi-led embargo on Qatar has been mildly beneficial for Oman, but could have negative longer-term effects if it prompts a reassessment of the region s attractiveness by foreign investors much needed in Oman. Indeed, yields on Omani debt have risen in tandem with their Saudi counterparts, following the latter s anti-corruption crackdown. VAT to push inflation higher in and 9 Inflation stood at.% y/y in September, on the back of a pick-up in food and transport prices. Inflation will rise further in, before steadying in 9, as the government continues to liberalize prices on energy and other goods and services and introduces VAT, late in H, offsetting downward pressures from global food and energy prices. (Chart.) Inflation is projected to average % over the forecast period. Large fiscal deficit to persist through and 9 The average oil price is expected to hold steady at $ per barrel in through 9. Yet with Oman s estimated breakeven price averaging $9 dollars for the same period, the fiscal balance will remain in deficit indefinitely. The deficit will edge lower over the forecast period, but remain alarmingly large at % of GDP for and % for 9. (Chart.) Financing these shortfalls will also be increasingly challenging. Government revenue growth should be decent in and 9, helped by a projected average OMR million per year in receipts following the launch of Khazzan. While the implementation of the VAT is not expected until the second half of next year, it should eventually add some OMR. billion in annual receipts. As such, government revenue growth is seen averaging % over the next two years. Our base case sees government expenditures expanding modestly by -% per year in and 9, as fiscal consolidation efforts become more politically challenging and economic growth eases. Sharp spending cuts, however, are possible if downside risks prevail. Regional tensions will deter the government from large cuts in defense spending, while the f f 9f Source: National Center for Statistics and Information, NBK estimates Chart : Current account balance (% of GDP) f f 9f Source: National Center for Statistics and Information, NBK estimates Chart : Central bank foreign assets (USD billion) 9 9 Oct- Apr- Oct- Apr- Oct- Apr- Oct- Source: Central Bank of Oman Chart : Private sector credit and deposits Credit Deposits 9 9 Oct- Apr- Oct- Apr- Oct- Source: Central Bank of Oman NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

15 MENA Economic Outlook - Q wage bill may be protected to offset the slowdown in economic growth and the impact of VAT. Increased debt will also push the interest bill higher. Meanwhile, investment expenditure will be constrained, with the government foregoing unnecessary spending. At the expected pace of revenue growth, expenditures would have to decline by % each year between and to balance the fiscal accounts well below our base case.... Chart : Policy rates (%) Oman repo rate US federal funds target... More debt issuance likely given large financing challenge Our fiscal forecasts imply a funding requirement of $9 billion in and $ billion in 9, which is lower than the average $ billion per year in -. Some of this is likely to come from the further drawdown of government assets, including both the estimated $ billion in sovereign wealth fund assets and the central bank s $ billion in FX reserves. (Chart.) But the government will also utilize domestic and international borrowing markets. It borrowed $ billion internationally in and, if previous financing patterns are maintained, it could borrow $ billion per year in and 9. This will see the stock of government debt grow to % and % of GDP, respectively, from % in. As a result, the interest burden could increase to % of total spending in 9, compared to.% in. Funding conditions could deteriorate in an environment of rising interest rates and concerns over the government s fiscal position. Both S&P and Moody s recently downgraded Oman over such worries. Current account deficit to shrink on a rise in LNG exports Oman will remain a net borrower in its external accounts. The current account deficit will persist in and 9, albeit shrinking as a share of GDP on the back of a rising trade surplus. Steady oil prices and higher LNG exports should help offset a mild expansion in the import bill. Remittances will be broadly steady thanks to a weaker labor market, while a stronger focus on tourism and the ease of doing business are expected to keep the service deficit in check. The current account deficit is seen at single digits for the first time in years, averaging % of GDP over the two years. (Chart.) This will leave the economy needing to attract $ billion in capital per year to avoid a further drawdown in official reserves. Banking system sees liquidity conditions tighten slightly Monetary conditions are projected to tighten as private lending increases at modest single digit levels to compensate for the higher cost of living and deposit growth continues to ease due to weaker economic activity. (Chart.).... Oct- Apr- Oct- Apr- Oct- Source: Central Bank of Oman Chart 9: Exchange rate (OMR/USD).. Spot M forward Dec/ Jun/ Dec/ Jun/ Dec/ Chart : Muscat Securities Market (index),,,9,9,,,,,,,,,,,,,,,,,, Nov- May- Nov- May- Nov- Source: Muscat Securities Market Lending growth is forecast to weaken to % in and 9, compared to 9% between and. Households and non-financial companies, the biggest drivers of credit, are seen turning to banks to accommodate VAT and to cope with slower economic growth. We expect the currency peg to be maintained, though it has experienced some pressure in offshore markets. The -month forward rate jumped to swap points over the spot rate in July following the Saudi-led blockade on Qatar. It has since dropped, but increased again following the Saudi corruption crackdown. As of early December the -month forward rate stood at swap points over the spot rate. (Chart 9.) Meanwhile, the prospect of rising US interest rates may compound pressures, which due to the peg may see domestic rates rise in tandem. (Chart.) NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

16 MENA Economic Outlook - Q Nonetheless, the banking sector remains well capitalized. According to the CBO s latest quarterly financial soundness statistics (June ), credit risk remains low with nonperforming loans at.9% of gross loans. Capitalization was also high, with a capital adequacy ratio of.% in Q. Stocks weighed down by weaker economy The weaker operating environment continues to weigh on Omani corporates, with most still reporting weaker earnings. The MSM decreased by.9% y/y in November to reach, hovering near -year lows. (Chart.) This leaves Oman as the second worst performing market in the GCC, down % YTD, trailing Qatar s % contraction and well below Abu Dhabi s % drop. NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,

17 MENA Economic Outlook - Q Qatar outlook Non-oil growth to slip further as diplomatic row persists > Daniel Kaye Head of Macroeconomic Researcht +9 9, danielkaye@nbk.com Overview and outlook GDP growth is expected to pick up to.% in from.% in, but this improvement is contingent on the startup of the much-delayed Barzan gas project, which would add % to total gas output. Chart : Real GDP growth Hydrocarbon Non-hydrocarbon Total Non-oil growth, by contrast, will remain under pressure as the GCC diplomatic rift disrupts investment, trade and the business climate. While the initial shock to the economy has passed, an intensification of the dispute presents a downside risk to growth. Financial sector flows have stabilized after government cash injections pushed up deposit growth. Further interest rate hikes will be needed to support the exchange rate peg, but risk tightening credit conditions at a time when the economy requires support. The budget allocates funds for food security schemes and sports stadia, but will not provide a large fresh stimulus to the economy. The fiscal deficit will narrow to a manageable % of GDP. Growth to pickup in, but risks skewed to the downside Our forecast for GDP growth in has been revised down to.% from.% before, driven by the continued fallout from the GCC diplomatic rift which shows few signs of resolution. (Chart.) This will still be a pickup from the.% expected for, with the rebound driven by the startup of the long-delayed Barzan gas project, which could boost real hydrocarbon sector GDP by %. (Chart.) Given the scope for further delay at Barzan and the potential for an intensification of the diplomatic dispute, the risks to our growth forecast are on the downside. Non-oil growth in has been downgraded to.% from.% before, and is weaker than the.% now expected for. The initial shock to the economy from the dispute which started in June has passed, with imports returning close to pre-crisis levels, new trade routes established and capital flows more stable. But the economy remains under pressure. Corporate earnings have been hit, equity and real estate prices have slumped (chart ), and the more difficult funding climate has put strain on banks and the currency peg. Although trends are obscured by data issues, our view is that the flow of people and tourists into Qatar has also been significantly affected. The resident population was up % year-to-date in November, compared to -% in the equivalent period in the previous five years. Population growth, NBK estimates - Chart : Oil and gas production (million barrels of oil/oil equivalent per day) Crude oil Condensates & NGLs Natural gas f Source: JODI, BP, OPEC, NBK estimates 9 e f 9f Chart : Real estate price index (index) GCC dispute begins Jan- Jul- Jan- Jul- Jan- Jul- Source: Qatar Central Bank - 9 Key economic indicators f f 9f Nominal GDP USD bn Real GDP % y/y Oil % y/y Non-oil % y/y.... Inflation % y/y.... Budget balance % of GDP Source: Official sources, NBK estimates NBK Economic Research, T: (+9) 9, F: (+9) 9, econ@nbk.com, NBK,